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Power Sees High-Voltage Deal-Making

23 March, 2010
Power sector appears to be the current flavour of deal hunters particularly in the private equity space.
 
According to data compiled by VCCedge, the financial research platform of VCCircle, power and utility deals have registered a more than 200% jump in deal value from $274 million across six deals in April 2008 to March 2009 to $820 million across 14 deals in April to March18, 2010
period.
 
What is driving deals is the huge demand-supply gap and the multiple formats of investible opportunities that exist in this space. The recent largest PE deal in almost two years–the $425-million PE infusion in energy firm Asian Genco Pte Ltd —is a testimony to the growing investor appetite in this space. Asian Genco is developing a power portfolio of hydro, thermal and non-conventional assets and has an aggregate capacity of nearly 4000 MW under construction.
 
“IIt has a highly differentiated portfolio. Its carefully chosen assets produce power in the peak hours of the day and during summer months.  Hydropower plants, which run at peak capacity during these periods, are able to meet peak demand in the most cost-efficient way.” said Gautam Bhandari, Head, Morgan Stanley Infrastructure Partners, which led the deal among other investors including Norwest Venture Partners, General Atlantic LLC, Goldman Sachs Investment Management, Everstone Capital Goldman Sachs Investment Management, Everstone Capital and PTC India Financial Services. 
 
In India, the peak shortage has been hovering between 11% and 13% (approx.) and energy shortage is between 6% and 8.5% (approx), according to industry estimates. Peaking power plants, also known as peaker plants are those that generally run only when there is a high
demand, known as peak demand for electricity.
 
“The revenues and the margin profile of peaking plants are much higher than base load plants,” said Ranjit Pandit, MD, General Atlantic Partners, which also participated in the consortium, explaining the investment thesis.
 
Power Struck
 
Even excluding the big-ticket Asian Genco deal, which has certainly upped the total deal value substantially for the space, the power sector has continued to seek investors’ attention in the recent past.
 
Without taking into the account the Asian Genco deal, the PE deal value in the sector stood at $395 million across 13 deals, a rise in value of 44%.
 
Consider this: Hyderabad’s Ind-Barath Power Infra Ltd raised $100 million in funding from Sequoia Capital India, Bessemer Venture Partners and returning investor Citi Venture Capital International (CVCI). IDFC Project Equity has been a prolific dealmaker in the space
by closing investments in Essar Power, Adhunik Power and Natural Resources and GMR’s Kamalanga Energy SPV last year.
 
Explains Kuljit Singh, Partner, Transaction Advisory, Ernst & Young, power projects have a huge IRR. It offers a huge equity arbitrage opportunity”. While there is a huge amount of deal flow seen in the space, only few projects are able to get funding, he added.
 
Also, the sector is beset with a lot of development challenges such as obtaining clearances, fuel supply and regulatory risks.
 
Says Sohil Chand, MD, Norwest Venture Partners, “It is very difficult to get a project to a stage where an external investor will invest in.”
 
Finding The Right Match
 
The kind of funding that is seen in the Indian market is that the promoters only seek to raise about 30-40% of the total equity financing required for the project. They resort to raising the balance
through public markets but are often unable to do so, leading to delays in implementation, Singh says.
 
Considering the sweet spot of growth equity in India is in the range of $50-$60 million, most of the monies have been raised at the SPV level for part-financing projects.
 
Explains Bhandari of MSIP, ““Unlike a typical private equity deal, we have come in more as a partner to the company and its projects””.  With the current round of equity financing in Asian Genco, the company has completed the total equity financing required for the project, it said in a statement.
 
Valuation is another big hurdle in the way of deal-making. “There exists a huge expectation mismatch and Indian promoters want to leverage their equity to the maximum extent possible”, says Singh. This does not go down too well with global institutional investors. Also, not all individual projects can tap money from capital markets either.
 
Power, the next telecom?
 
So, can power do a telecom in terms of deal-making activity? Bhandari of MSIP says, ““There are a lot of parallels that can be drawn between both sectors — both involve provision of basic services and benefit from large unmet demand.”
 
Considering the deal flow in the space, investors believe that power indeed has the potential to become the next telecom in deal-making but at the right valuations.

 


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Power Sees High-Voltage Deal-Making

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